May

27

I was down to a couple of dollars at one point. But then my luck changed and I won the bulk of my money back. In the end I lost only $10. This was a successful deal. Trader recounting his casino adventure.

This is an interesting observation and, I'm afraid, all too reflective of the mentality that seems dominates the street and those who cover it. Several years back Vic and Laurel introduced the "silo concept" whereby some of our finer firms kept stashes of hidden revenues to be reported only when needed to meet or beat estimated (in many cases, self-estimated) earnings figures.

In a neat twist on this concept, many of these same firms are coming out with estimates of staggering losses. When, in fact, the losses are not quite so substantial (but still eye-popping), our markets, as well as those in Europe and Asia, respond with enthusiastic buying. ("Yes, we thought the firm would lose $X billion, but we consider the loss of only $X-1 billion a success.")

No kidding? That's great, please sell me some more of that new and increasingly dilutive equity!

A similar scenario might feature me arriving home from the track and telling the wife to get dressed for a big dinner at a very expensive place. In her simplicity she beams and shouts "You had a big day! How much did you win?"

"Win? Who said I won? Usually I drop about $300; today it was only $200. I thought I'd blow the other C-note on a nice dinner to celebrate."

Sure, I had to settle eating a tuna sandwich alone but my pre-emptive action forestalled an evening of repetitive kvetching and by tomorrow, when her sister calls to ask if I was a loser once again, she'll respond, "No, he had a relatively good day." And her sister will report to her brother, and her brother to their parents, and, before you know it, I'll be a legendary profit-making machine.

From such tiny acorns grow mighty LTCMs. Process remains important only as long as the market recognizes it as valid. As soon as doing right is viewed as irrational and doing wrong as profitable, doing wrong will become the order of the day. And those who have failed time and time again (i.e., the banks) will be given another opportunity. Those who got chopped and dismembered will be forgotten.

Nothing is too big to fail. And a loss is still a loss regardless of how it came about. Just ask Walter Wriston.